Economic Governance of the European Union: Activate the Emergency Brakes?

Walter Benjamin polemicised against the naïve idea of revolutions as the locomotives of world history. In his thesis on the concept of history1 Benjamin suggested that if this locomotive, constructed by previous society, were allowed to circulate, most likely it would be heading inexorably into the abyss. ‘Marx said that revolutions are the locomotive of world history. But perhaps things are very different. It may be that revolutions are the act by which the human race travelling in the train applies the emergency brake.’ Painting such a picture in an article about European economic governance would suggest a Eurosceptical position, which, with Brexit, has recently seen a unique moment of glory. But this is not our intention. In this instance, the activation of the emergency brakes can serve to question the direction of the trip, the speed of the train, and the way in which the tracks and stations are built. In particular, it is important to understand the relation between economic governance and the euro as well the relation between its institutions and democracy and legitimacy. Economic, social, and political reality calls into question the continuation, as if nothing has changed, of this course and the speed at which it is being travelled. Without substantive changes a derailment is more likely than ever. In fact, such a widespread wave of concern about the very future of the integration process has probably never before been sparked by a European crisis.

I intend to address one issue here: the impact of the EU’s new economic governance in terms of the democratic quality of the process and its legitimacy. To do so I will first look at the economic crisis as a crisis of expectations of economic integration. This is an important factor because the impact of the economic crisis has undone the idea of ‘a Union for all’, which points to a significant constitutional change in the integration process. I will try to show the effects in respect to public opinion and, finally, propose an interpretation of the new economic governance and its impact.

The economic crisis and its consequences

The effects of the economic crisis in Europe are well enough known not to require more than a brief résumé here. However, the numbers are so extraordinary in terms of unemployment, poverty, and growing inequality that they deserve to be pointed out.

According to Eurostat,2 the unemployment rate for August 2016 is at 2009 levels. It was 10.1% in the euro area and 8.6% in the whole Union, with significant disparities between the unemployment rates of Germany (4.2%) and the Czech Republic (3.9%), on the one hand, and other countries such as Greece (23.4%) or Spain (19.5%), on the other. In terms of the initial expectations, what is relevant here is that since 2008 disparities in employment rates and unemployment as a whole have seen a more pronounced increase precisely within the euro area.3 Other social data show the growing social dualisation:4 125 million poor people in Europe today and an increasing concentration of wealth.

But as Stiglitz5 and Fitoussi6 point out, alongside the economic differences other important cleavages have emerged around beliefs and attitudes, such as diverse views on cooperation and solidarity between countries. One element is the growing North-South gap, which is one of the chasms that threatens to sink the European project. The introduction of the euro is at the centre of the criticisms. It is seen as something that has broken the promises made in the process of European integration. The causes may be found in the inadequacies of the currency’s origin, the launch of the single currency, and the resulting impact on the overall economic architecture of the Union. Stiglitz suggests that the main factor that could permit the optimal functioning of a single currency is a ‘sufficient resemblance between the countries’. In his view, the centrality of budgetary concerns, christened ‘convergence criteria’, leads in fact to more divergent economies. The inequality between countries with budgetary constraints imposed by the convergence criteria contributed to this divergence. This is also Aglietta’s view, for whom the nominal convergence of interest rates resulting from financial unification has led to a real divergence of economies.7 For Aglietta the German authorities are, for the most part, responsible for this budgetary obsession expressed through mandatory requirements to prevent excessive deficits, which resulted in the Stability Pact adopted in Amsterdam on 17 June 1997, the covenant that ‘enshrined the incompleteness of the euro’.

To these factors we have to add a clearly insufficient European budget and the lack of political institutions capable of ensuring the legitimacy of the single currency and the decisions linked to post-crisis responses. All of this in the absence of a constitutional order that is implicit in the social acceptance of a currency and that guarantees its economic and political viability. This is all the more striking, as the euro has not ceased to be, from the beginning and above all else, a political project.

In more doctrinaire economic terms, the euro did not meet some of the basic conditions for an optimal currency area and was not equipped with appropriate devices to respond to crisis situations: setting prices and wages, internal budget adjustments, mobility of labour, and a mechanism for budgetary transfers between Member States.8

The reality shows that the initial expectations of the virtuous articulation between single market and single currency are far from being met. The introduction of the single currency was to increase competition, allowing price convergence and a better distribution of resources over the territory, and thus strengthen the economic union, but this is not how the reality developed, and forecasts point to a consolidation of the divergent trend. By 2017, GDP per capita is expected to be 50% lower than the European average in Greece and Portugal, 23% in Spain, 17% in Italy, while in Germany it will be 21% higher.

New economic governance and democracy

The crisis revealed the failures of an economic governance that rested on the principles of monetary and fiscal neutrality and the implementation of structural reforms that would supposedly allow an increase in potential growth and a decrease in the unemployment rate. This ‘government by rules’,9 very dear to the German ordoliberal model, proposed joint supranational institutions, primarily related to monetary control and inflation, whose paradigm is the European Central Bank (ECB), and the intergovernmental coordination of economic policies.10 Monetary union was built on an optimistic premise that would both conjure up crisis and then be used to manage it, that is, sufficient voluntary cooperation between states and a commitment to avoid budgetary crisis.

In practice, it articulated two formulas of ‘cooperation’, which we will call soft governance through the open method of coordination and which has taken the form of different institutions such as the Broad Economic Policy Guidelines (BEPG), the guidelines on employment policy, or the Cologne process, a macroeconomic dialogue involving the Ecofin Ministers of Labour and Social Affairs, the European Commission, the ECB, as well as employers and unions aimed at increasing economic growth and employment without altering price stability. This model sought to achieve results through dialogue and voluntary cooperation between different institutions and actors.

The second process, hard governance, was based on a clear mechanism of material sanctions in order to ‘tie the hands of states’; the clearest example is the Stability and Growth Pact. In real terms, the Maastricht system of economic governance is based on three main features: the coordination of economic policies of Member States; the prohibition (except in exceptional circumstances) of any form of financial solidarity between states and of the monetary financing of states through the ECB or national central banks; and limits on fiscal deficits and public debt. Interestingly, the first reform of this model – in 2005 – took place after the failure of Germany’s and France’s fiscal deficit indicators.

As a whole, this model of economic governance failed to manage the crisis for several overlapping reasons: insufficient monitoring of macroeconomic imbalances, especially when states did not have at their disposal the use of currency devaluations to respond to differences in competitiveness and pricing; the total absence of coordination of budget policies, despite Article 121 of the Treaty, which considers the coordination of economic policies a ‘matter of common interest’, and the BEPG where in practice coordination has not existed; an underestimation of the interdependencies between Member States, meaning that the impact that structural asymmetries could have on economic performance for the whole area was ignored; and the marginalisation of the EU budget as a tool of economic policy – the Union’s budget being not only far smaller than its federal counterparts throughout the world, even when these are limited as in the US, but also incapable of making the budget an instrument of proactive economic policy.

Last but not least, in political terms, the crisis has blown away the constitutional artifice constructed out of Maastricht.11 This constitutional commitment based on the euro area consisted of the combination of centralised monetary policy with decentralised political, economic, budgetary, and fiscal incentives connected to the common currency. In the search for an entente that would allow everyone to feel relatively comfortable, the use of the opt-outs created the reality of different economic constitutions. However, the favourable economic situation until 2008 allowed a relatively friendly coexistence of these different realities. The victory of the Brexit vote and other centrifugal dynamics make it clear that diversity has facilitated the dislocation between states and societies and put at risk the integration process itself.

‘New economic governance’ is the set of responses adopted by the European institutions in answer to the crisis. We thus now have the third reform of economic governance. Given both the accumulation of new powers and the impact and consequences of them, there is some agreement among scholars that we are dealing with a new phase, and I agree. Obviously, there is no question here of a radical change away from the basic orientations of previous economic policy; what is meant is the kind of impact the new institutions and mechanisms have had on the political structure of the Union, creating a new political and institutional situation, with important implications for the process of integration. Roland Erne,12 giving a new meaning to the words of Barroso in 2010, speaks of ‘a silent revolution’ with emphasis on the punitive and automatic character of the new economic governance mechanisms.

The new features are:

support plans for the balance of payments of Hungary, Latvia, and Romania; plans to ‘rescue’ Greece, Ireland, and Portugal, and plans to help recapitalise the financial system for Spain and Cyprus;

the launch of a European financial stabilisation mechanism and a European Stability Mechanism (ESM) with a lending capacity of 500 billion euros and the aim to ensure financial stability in the euro area;

the reform of the Stability and Growth Pact, via the ‘Sixpack’ and the implementation process of the ‘European semester’ for reinforced budgetary and macroeconomic surveillance of Member States. Through the newly created mechanism of the Excessive Deficit Procedure, the Commission may initiate a process that requires a country to undergo a programme of structural reforms. The macroeconomic surveillance is carried out under the new procedure for economic imbalances; this procedure can generate specific recommendations for certain countries, including sanctions;

the European Semester – an annual cycle of surveillance and coordination of budgetary and economic policies;

the adoption of Euro + to strengthen fiscal discipline, and a strengthening of the coordination of economic policies in the euro area covenant;

the adoption of a ‘Twopack’ for ex ante budgetary and economic policy surveillance;

the adoption of the Treaty on Stability, Coordination and Governance (TSCG) and the inclusion of the ‘golden rule’ of balanced budgets in national law.

In short, the four pillars on which these mechanisms are articulated would be: fiscal surveillance, macroeconomic surveillance, socio-economic coordination, and financial assistance. It is a complete package that is intended to be expanded and completed with the proposals contained in the report of the five presidents of the EU institutions. The Five President’s Report advocates more unity in economic, financial, budgetary, and political decision-making.13 It speaks of ‘... a political union that provides the basis of these three unions through a real strengthening of democratic control, legitimacy, and institutions’.

To achieve this, the Report proposes the creation of a system of authorities for competitiveness, ‘that manage to keep track of the policies and results in competitiveness’ and are able to guide social actors and have ‘taken into account the guidelines of the authorities during wage negotiations.’ A strengthened Macroeconomic Imbalance Procedure (MIP) is also proposed. The Report notes that the MIP ‘should not be used alone to detect imbalances but also to promote structural reforms through the European Semester.’ The need to pay greater attention to the results in employment and in the social arena aims at strengthening coordination of economic policies within the European Semester, simplifying its contents to make it more effective and clear.

In the banking field, a series of measures to strengthen the role of the Single Supervisory Mechanism are considered, the most important novelty being the creation of a European Deposit Insurance Scheme (EDIS); in this context the union of the capital markets is considered a priority. The idea of reinforcing what the Report calls ‘responsible budgetary policies’ leads to the creation of an advisory European Fiscal Board as a public and independent body to assess the way in which budgets and their implementation comply with European directives.

The Report’s proposal for democratising this scheme basically concerns three issues. The first is strengthening the ‘economic dialogue’ between the European Parliament and the Council. Second, strengthening the dialogue between the Commission and the Eurogroup in the context of the discussions on the European Semester and also improving cooperation around the European Parliamentary Week organised by the European Parliament in cooperation with national parliaments (here the report suggests a presence of representatives of the Commission and the Council). Third, improving the initiatives that already exist in the legal framework, such as providing for a European Commissioner in the national parliaments to request explanations concerning the recommendations made under the Excessive Deficit Procedure.

Multiple problems of economic governance to be depoliticised

Since 2011, the year from which we can date the new governance with the launch of the Sixpack, economic developments in the Union in general and more specifically in the euro area have been disappointing. This article is not the place to consider alternative economic proposals, but at least we want to point out the contradictions implicit in the current situation: on the one hand the modest impact of the economic measures in relation to their objectives, on the other hand the high social cost and finally the democratic inconsistency of the proposals, that is to say, the lack of relationship between the identified problems and the democratic dimension of the proposals.

Without going into too much depth, I would like to highlight this last feature, which I think is the most important element of this economic governance: the lack of democratic meaning.

A crazy constitutional construction

As Sergio Fabbrini has said, the economic crisis has swept away the ‘constitutional consensus’ that came out of Maastricht. Arrangements between the supranational and intergovernmental levels were established on the basis of an underlying agreement that was part of the shared values of the integration process: ‘a Europe for all’, that is, a process of inclusive and incremental integration that would not leave anyone out and whose dynamics would be strengthened by the realisation of real economic convergence among EU countries. The euro area would function as the vanguard of this explicit promise of ‘progress for all’. But the crisis has swept away this consensus. At bottom it blocks any growing convergence of economic systems and living conditions. As convergence grinds to a halt, the system is beginning to collapse. So far, economic performance, which has enabled economic governance, is not exhibiting any reversal of the increasing divergence between northern and southern Europe.

Along with this ‘constitutional mutation,’ there are other factors that make up the bizarre constitutional construction installed by the new economic governance.14 First, the heterogeneous legal nature of the texts. There are 8 Community texts (7 regulations and a directive) with intergovernmental treaties, which impose heavy constraints for states and others (as the Euro Plus Pact does), but they are statements without obligations.

There is a complex geography of overlapping group perimeters of states whose place in economic governance depends on their relationship with specific measures: there are 28 Member States of the Union that also take part in the Twopack and the ESM;15 there are 25 states covered by the TSCG, and 24 states by the Euro Plus Pact. Moreover, voting arrangements vary according to the legal frame: qualified majority voting (or simple majority) for EU states or those of the euro area affected by the Two- or Sixpack, and reversed qualified majority voting for euro area members under the TSCG. According to types of issue, in the European Council decisions are taken either by agreement or by a qualified majority of 80% (in some cases 85%).

Similarly, the Union institutions involved in the procedures vary according to the affected domain. The complexity of the procedures can be shown, for example, in the course of the 2016 European Semester where three procedures are developed accompanied by numerous documents for examining the aggregate euro area budgets, based on the macro­economic framework provided by the Annual Review of growth, leading to Commission recommendations discussed by the Eurogroup and adopted by the Council.

The system is so rigid and so confusing, procedurally and technically, that without sufficient technical expertise it is almost impossible to monitor the process as a whole. As far as national policy makers and parliamentarians are concerned, they have at best a rough idea of what the system involved does.

A new institutional balance

The management of the economic crisis – with its asymmetric distribution of possibilities of intervention between the institutions and the constitutional and institutional disorder fuelled by the tangle of treaties, agreements, rules and institutions – has distracted attention from the institutional shift that has occurred in the European institutions: the increasing centrality of the European Council and the reinvention of the European Commission as a political secretariat of the Council.

Analysis of three specific domains related to economic governance, financial stability, flexible coordination of national policies, and financial­sector supervision and surveillance of economic policy, brings us to conclude that two things are being done, which may seem contradictory: the strengthening of the Commission’s role and its shift from executive to technical tasks.

Since the beginning of the crisis the political initiative to find ‘European’ responses to the economic and financial tsunami that was taking place moved the European Council to the tip of the EU institutional triangle. The visibility of what Europe did was embodied in the summits of heads of state and government, in their statements and final statements.

In the first forms of financial assistance, for example, the Commission was in charge of loan capital and distribution, although it was the Council that decided on the conditions. In the second form of financial assistance, initially embodied by the European Financial Stability Facility (EFSM), the task of distributing the 440 billion euros of total appropriations was delegated to a new organisation that took the form of a limited company registered in Luxembourg. The same has occurred with the ESM, which has replaced the previous EFSF and EFSM.16

The participation of the Commission in the troika, together with the International Monetary Fund (IMF) and the ECB, is very relevant at the technical level and politically. The Commission is responsible for assessing needs and negotiating the protocol agreement with the country concerned, but the management is shared with the other two institutions. The conflict between the IMF and the Commission is well known, especially in its political dimension, with the former reproaching the latter for its insistence on austerity policies the Fund considered counterproductive. As in the 2012 conflict with Hungary around the negotiation of the country’s second aid programme, the Commission tried to virtuously articulate two requirements: exerting its authority as guardian of the treaties and its willingness to give satisfaction to the request of creditor countries.

The management of the Greek crisis highlighted the supporting role of the Commission. Its goal was to try to mediate between the Greek government and the other really significant institutions, particularly the Council and ECOFIN. The results were a disappointing management of the Commission itself, as the President of the Commission said repeatedly.

In sum, the most striking change in the balance of power between institutions relates to the consolidation of a model of governance based on rules and procedures that deal in a new way with responsibilities: the decision-making capacity assigned to the European Fiscal Board, ECB and ECOFIN, and the specialised and technical management to the Commission.

The measures referred to in the Sixpack, Twopack, or in the European Semester comprise an extensive panoply of procedures: for infringements of excessive deficits, a rapid alert system for the assessment of the macroeconomic situation of a country, a scheduled timetable for the European Semester, and procedures for macroeconomic and fiscal imbalances.

Most of these mechanisms operate on the basis of statistical indicators pointing towards comfort zones and risks and/or with trigger alerts, followed by the accompanying procedures. Naturally, in this context the Commission’s competences remain politically significant – advisory committees, country visits, recommendations etc. – but it is clear that the ‘political role’ of the Commission has lost relevance in relation to other actors, namely the Council.

Moreover, this model of crisis management rests on a technocratic idea of ‘management’: statistical indicators, automatic alerts, independent expert advice, etc. It is an approach that has been criticised for ignoring the political dimension of the debate over the very meaning of the crisis, its management, and the results of this management, particularly, but not only, in southern Europe. Interestingly, we see the emergence and consolidation of an extreme right which makes the critique of technocracy and bureaucracy in Brussels its hobbyhorse.

The European Parliament as a part of the institutional triangle has been relegated to a true institutional limbo, although it still maintains its role as co-legislator in directives relating to the banking union and accessing information, and in some cases it organises public hearings. It can take the initiative to invite other institutions, including individual states (under certain conditions), and it receives reports from the Commission related to the implementation of macroeconomic adjustment programmes. Under the European Semester, the Parliament’s role becomes more significant and includes that of co-legislator in some processes, and it has the leading role in organising the ‘parliamentary weeks’ with national parliaments; it can express its views in the draft Annual Growth Survey and the recommendations for each country.

But it is obvious that real power is far removed from these ordinary legislative processes and that conditions for exercising parliamentary scrutiny are not worthy of the name. At best, the Parliament is involved in information, participation in the legislative phase only, and only on some specific issues, along with some ‘institutional influence’ in general.

It seems clear that the traditional confrontation between the Commission and the Parliament has been replaced by that between the ECB and the ECOFIN Council. In any case, it can no longer be argued that the European Parliament is the institution whose powers have grown most since the Treaty of Maastricht. That view no longer reflects the new circumstances.

The Five Presidents’ Report offers no improvement in this regard: the scope of change continues to make the European Parliament a house with diminished responsibility and one unable to perform the function of even basic political oversight.

Given the European dimension of the measures and institutions proposed, this ‘control capacity’ was, since the beginning of the crisis, removed from the authority of national parliaments. In a system that, from the outset, heaps up democratic shortcomings, this new model of governance has increased the illegibility of the model, its opacity, and lack of control.

Following the models of governance proposed by Crum,17 we would highlight increased competences at the supranational level but in which political control remains in the executive of Member States and monitoring is performed through depoliticised technocratic processes and institutions.

This model implies that the entire political process operates beyond effective parliamentary control, both at European and national level. Moreover, the logic of the capacity to introduce changes is explained and understood according to the logic of classical international institutions, where the discretion of the Member-State governments increases and is superimposed on established procedures at the EU level, when available,on deliberative and decisional transparency or on the very right to selfgovernment.In the dynamics of the integration process, consolidation ofthis model helps to entrench this growing decisional opacity, the illegibility of the system to which we have referred, and the increasing centrality of states. They have created new dynamics comparable to the confrontation between creditors and sovereign debtors with different levels of democratic quality: the German Parliament is clearly not on the same level as the Greek Parliament.

These factors militate against the integration process and the possibility of creating a European public arena and socio-political subjects articulated by specifically European dynamics of conflict. A democratic solution would involve substantial changes in policy and institutional dynamics, conceivable changes around a model of democratic federalism mean, right now, activating the emergency brakes. The biggest risk at the moment is that the salvation of the euro is traded against the eternal damnation of everything else, starting with democracy. The European Union must not become like France’s ancien régime, a kingdom whose greatest glory coincided with the most miserable condition of its inhabitants lives.

Notes

1 Walter Benjamin, ‘Theses on the Philosophy of History’, Walter Benjamin (ed. Hannah Arendt), Illuminations, New York: Shocken, pp- 255-266 (Fontana/Collins, 1973); Benjamin, Gesammelte Schriften, Frankfurt a.M.: Suhrkamp, 1972-1989, I, 3, p. 1232. Michael Löwy points out that ‘This is one of the preparatory notes to “On the Concept of History”, which does not appear in the final versions of the document. The passage from Marx to which Benjamin refers appears in The Civil War in France: ‘Die Revolutionen sind die Lokomotiven der Geschichte’ (the word “world” does not appear in Marx’s text)’, http://www.walterbenjaminportbou.cat/sites/all/files/2010_Loewy_ANG.pdf